Friday, April 1, 2011

What does Carney know?

For more than a year now, Bank of Canada Governor Mark Carney has been warning Canadians about interest rates.

Critics have jumped all over his warnings as hypocrisy... Carney was the one who cut them, why would he be so surprised that Canadians are taking advantage of them?

Wasn't that the whole point of lowering them to begin with?

Some suggest that Carney is a very bright mind who knows exactly what's going on. The tight rope that he has had to walk between currency, manufacturing, employment, trade balance and international economic relations is a difficult one. And the consequences of Canadians gorging on house and consumer debt are a necessary by-product of resuscitating the economy.

Some even suggest that Carney, by bringing in emergency level interest rates and staving off a housing collapse in 2009, has created an opportunity for astute Canadians to divest themselves of debt laden real estate and prepare for what is coming.

There is no doubt that Carney is fully aware many Canadians aren't making astute decisions. He has noted that while Canada’s recovery has been the envy of the Group of 7, the recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Last November Carney appeared on CBC's Sunday Edition and said:

We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.

This passage caught my eye and intrigues me.

"We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate."

The inner circle of Central Bankers is a tight one and some have suggested that Canada's Central Banker Carney, a former Goldman Sachs employee, is tighter with the US Federal Reserve than most Central Bankers.

And this week Carney warned that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" is particularly chilling.

Does Carney know things that other Central Bankers do not?

This thought line intensified yesterday as the Federal Reserve finally complied with a court order to forced to disclose unredacted data on it's lending from it's discount window.

As initial scrutiny of the 25,000 or so pages of declassified information began, one glaring anomaly surfaced repeatedly.

Copious data exists about FX swap lines between the US Federal Reserve and other banks. Many critics have charged that these swaps were the means by which the Fed bailed out much of the world.

And as the information is studied, parties like Zero Hedge are looking at just what the terms were on these various borrowings.

To everyone's surprise, there was a whole lot of "NR" exemptions, aka redacted data.

What's redackted is data on par lent out, par received, net change, limit and undrawn available, which is critical to determine whether the Fed actually lost money on its FX swap transactions.

But what is even more stunning is that it appears that one Bank in particular (which everyone believes can only be the Bank Of Canada) has been purposefully and diligently redacted out of the 977 pages in the document highlighting the currency swap data.

Why?

Suddenly Carney's comments that the Bank of Canada is "providing as much transparency as we can about the future path of monetary policy, as much as appropriate," and his comment that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" becomes even more ominious.

What is going on between the US Federal Reserve and the Bank of Canada? What does Carney know that others do not? More importantly... how wise is it to ignore his year long warnings that Canadians need to prepare for significantly higher interest rates when he appears to be privy to such inside information?

Followers

History of Central Banks

“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."

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